Business Entities and Financial Management

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Questions and Answers

What is Jenna in charge of after her promotion?

Capital structure management

What type of business entity does Margie own if she is personally liable for all the store's debts?

Sole proprietorship

What is the term for the potential conflict of interest between a firm's owners and its managers?

Agency

What do financial analysts frequently use when conducting a financial analysis of a firm?

Accounting information Signup and view all the answers

Which occupation best fits into the corporate area of finance?

Chief Financial Officer Signup and view all the answers

What correctly defines a common chain of command within a corporation?

The controller reports directly to the chief financial officer Signup and view all the answers

What is a capital structure decision?

Establishing the preferred debt-equity level Signup and view all the answers

How are profits taxed in a sole proprietorship?

As personal income Signup and view all the answers

What is dependent on the owner's personal finances in a sole proprietorship?

Obtaining additional equity Signup and view all the answers

What is an advantage of being a limited partner?

Losses limited to capital invested Signup and view all the answers

What is a corporation?

A legal entity separate from its owners Signup and view all the answers

What is one advantage of the corporate form of organization?

Ability to raise larger sums of equity capital Signup and view all the answers

How does a limited liability company (LLC) prefer its profits to be taxed?

As personal income to its owners Signup and view all the answers

What is the primary goal of financial management?

To maximize the market value of existing stock Signup and view all the answers

What does the goal of financial management aim to increase?

Current market value per share Signup and view all the answers

What did the Sarbanes-Oxley Act in 2002 address?

Corporate accounting and financial fraud Signup and view all the answers

What is the primary intent of the Sarbanes-Oxley Act of 2002?

Increase the protections against corporate fraud Signup and view all the answers

What situation is most apt to create an agency conflict?

Basing management bonuses on the length of employment Signup and view all the answers

What aligns management's priorities with shareholders' interests?

Compensating managers with shares of stock that must be held for a minimum of three years Signup and view all the answers

What claim does Levi have against a manufacturer in case of a chemical spill on his property?

Stakeholder Signup and view all the answers

When does a seller place an order to sell shares of stock trading on the NYSE?

Secondary market Signup and view all the answers

The issuer of a security must be involved in all _____ transactions involving that security.

primary market Signup and view all the answers

What do security dealers do?

Buy and sell from their own inventory Signup and view all the answers

Which statement is correct regarding NASDAQ and NYSE?

NASDAQ has more listed stocks than does the NYSE Signup and view all the answers

What is the primary purpose of the NYSE?

To match buyers with sellers Signup and view all the answers

What is Uptown Markets' capital structure financed with?

45 percent debt and 55 percent equity Signup and view all the answers

What type of business did Will and Bill create if they both share in decision making and in business profits or losses?

General partnership Signup and view all the answers

What type of claim does an employee have on the cash flow of a company?

Stakeholders Signup and view all the answers

In which area of finance does Jamie work as a currency trader?

International finance Signup and view all the answers

What function is generally a responsibility assigned to the corporate treasurer?

Capital expenditures Signup and view all the answers

What does capital budgeting include the evaluation of?

Size, timing, and risk of future cash flows Signup and view all the answers

What factor does working capital management include?

Determining which customers will be granted credit Signup and view all the answers

Which form of business organization offers liability protection to some of its owners but not to all?

Limited liability company Signup and view all the answers

What applies to a general partnership?

Any one of the partners can be held solely liable for all of the partnership's debt Signup and view all the answers

What is correct about a limited partnership?

Any partner can transfer his or her ownership interest without ending the partnership Signup and view all the answers

Study Notes

Business Entities and Structures

Capital structure management involves overseeing a firm's external financing options.
A sole proprietorship is fully owned by one individual who bears personal liability for the business's debts.
General partnerships involve shared decision-making and liability among partners, while limited partnerships provide liability protection to limited partners.
Limited liability companies (LLCs) offer liability protection but prefer to have profits taxed as personal income.

Financial Management Principles

The primary goal of financial management is to maximize the market value of existing stock and increase the current market value per share.
Agency conflict arises from potential conflicts of interest between a firm's owners and its managers, often exacerbated by management incentives, such as bonuses based on tenure rather than performance.

Financial Oversight and Regulation

The Sarbanes-Oxley Act of 2002 aimed to enhance protections against corporate fraud, prompted by the corporate accounting scandals of the 1990s.

Capital Markets and Securities

The secondary market is where existing securities are traded, while the primary market involves transactions with the issuer of the security.
Security dealers operate by buying and selling from their own inventory, forging liquidity in the market.
The NYSE's purpose is to connect buyers with sellers, whereas NASDAQ features a greater number of listed stocks.

Financial Analysis Functions

Analysts utilize accounting information for comprehensive financial assessments of firms.
The role of a chief financial officer is pivotal in corporate finance, responsible for strategic financial decisions.
Capital expenditures involve significant investiture decisions in a firm and include capital budgeting that evaluates size, timing, and risk of future cash flows.
Working capital management focuses on day-to-day financial operations, like granting credit to customers.

Stakeholder Considerations

Employees have claims on the cash flows of a firm, representing them as stakeholders.
Environmental and external factors can create stakeholder claims, such as those resulting from property damage due to corporate actions.

Key Financial Roles

Within a corporation, the controller typically reports directly to the chief financial officer, ensuring alignment in financial reporting and management practices.

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Description

This quiz covers key concepts in business entities and structures, as well as principles of financial management. It addresses various types of business ownership, their implications, and regulatory frameworks like the Sarbanes-Oxley Act. Test your understanding of financial oversight and management dynamics.